UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

FORM 10-Q

 

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 27, 2013

 

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from:                  to                  

 

Commission File Number 001-31560

 

SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY

(Exact name of registrant as specified in its charter)

 

Ireland

 

98-0648577

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

38/39 Fitzwilliam Square

Dublin 2, Ireland

(Address of principal executive offices)

 

Telephone:  (353) (1) 234-3136

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer: x

 

Accelerated filer: o

 

 

 

Non-accelerated filer: o

 

Smaller reporting company: o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of January 24, 2014, 328,755,155 shares of the registrant’s ordinary shares, par value $0.00001 per share, were issued and outstanding.

 

 

 



 

INDEX

 

SEAGATE TECHNOLOGY PLC

 

 

 

PAGE NO.

 

 

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets — December 27, 2013 and June 28, 2013 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three and Six Months ended December 27, 2013 and December 28, 2012 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Six Months ended December 27, 2013 and December 28, 2012 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Six Months ended December 27, 2013 and December 28, 2012 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity — Six Months ended December 27, 2013 (Unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

Item 3.

Defaults Upon Senior Securities

36

 

 

 

Item 4.

Mine Safety Disclosures

36

 

 

 

Item 5.

Other Information

37

 

 

 

Item 6.

Exhibits

37

 

 

 

 

SIGNATURES

38

 

2



 

PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

 

 

December 27,
2013

 

June 28,
2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,293

 

$

1,708

 

Short-term investments

 

46

 

480

 

Restricted cash and investments

 

4

 

101

 

Accounts receivable, net

 

1,615

 

1,670

 

Inventories

 

948

 

854

 

Deferred income taxes

 

116

 

115

 

Other current assets

 

267

 

484

 

Total current assets

 

5,289

 

5,412

 

Property, equipment and leasehold improvements, net

 

2,128

 

2,269

 

Goodwill

 

477

 

476

 

Other intangible assets, net

 

329

 

405

 

Deferred income taxes

 

465

 

456

 

Other assets, net

 

202

 

225

 

Total Assets

 

$

8,890

 

$

9,243

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,577

 

$

1,690

 

Accrued employee compensation

 

267

 

335

 

Accrued warranty

 

158

 

176

 

Accrued expenses

 

455

 

407

 

Current portion of long-term debt

 

 

3

 

Total current liabilities

 

2,457

 

2,611

 

Long-term accrued warranty

 

141

 

144

 

Long-term accrued income taxes

 

103

 

87

 

Other non-current liabilities

 

122

 

121

 

Long-term debt, less current portion

 

3,572

 

2,774

 

Total Liabilities

 

6,395

 

5,737

 

Commitments and contingencies (See Notes 11 and 13)

 

 

 

 

 

Equity:

 

 

 

 

 

Seagate Technology plc Shareholders’ Equity:

 

 

 

 

 

Ordinary shares and additional paid-in capital

 

5,404

 

5,286

 

Accumulated other comprehensive loss

 

(7

)

(13

)

Accumulated deficit

 

(2,902

)

(1,778

)

Total Seagate Technology plc Shareholders’ Equity

 

2,495

 

3,495

 

Noncontrolling interest

 

 

11

 

Total Equity

 

2,495

 

3,506

 

Total Liabilities and Equity

 

$

8,890

 

$

9,243

 

 

The information as of June 28, 2013 was derived from the Company’s audited Consolidated Balance Sheet as of June 28, 2013.

 

See Notes to Condensed Consolidated Financial Statements.

 

3



 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

December 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Revenue

 

$

3,528

 

$

3,668

 

$

7,017

 

$

7,400

 

Cost of revenue

 

2,541

 

2,676

 

5,055

 

5,347

 

Product development

 

312

 

277

 

606

 

545

 

Marketing and administrative

 

190

 

139

 

371

 

289

 

Amortization of intangibles

 

25

 

20

 

45

 

39

 

Restructuring and other, net

 

16

 

1

 

18

 

1

 

Total operating expenses

 

3,084

 

3,113

 

6,095

 

6,221

 

Income from operations

 

444

 

555

 

922

 

1,179

 

Interest income

 

1

 

2

 

6

 

4

 

Interest expense

 

(49

)

(55

)

(93

)

(111

)

Other, net

 

46

 

(3

)

47

 

27

 

Other expense, net

 

(2

)

(56

)

(40

)

(80

)

Income before income taxes

 

442

 

499

 

882

 

1,099

 

Provision for income taxes

 

14

 

7

 

27

 

25

 

Net income

 

428

 

492

 

855

 

1,074

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

 

Net income attributable to Seagate Technology plc

 

$

428

 

$

492

 

$

855

 

$

1,074

 

Net income per share attributable to Seagate Technology plc ordinary shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.27

 

$

1.33

 

$

2.46

 

$

2.81

 

Diluted

 

1.24

 

1.30

 

2.39

 

2.73

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

336

 

369

 

347

 

382

 

Diluted

 

346

 

379

 

357

 

394

 

Cash dividends declared per Seagate Technology plc ordinary share

 

$

0.43

 

$

0.70

 

$

0.81

 

$

1.02

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

December 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Net Income

 

$

428

 

$

492

 

$

855

 

$

1,074

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

Change in unrealized loss on cash flow hedges

 

(2

)

 

(1

)

 

Less: reclassification for amounts included in net income

 

 

 

 

 

Net change

 

(2

)

 

(1

)

 

Marketable securities

 

 

 

 

 

 

 

 

 

Change in unrealized (loss) gain on marketable securities

 

 

(4

)

1

 

23

 

Less: reclassification for amounts included in net income

 

 

2

 

 

1

 

Net change

 

 

(2

)

1

 

24

 

Post-retirement plans

 

 

 

 

 

 

 

 

 

Change in unrealized gain on post-retirement plans

 

1

 

 

1

 

 

Less: reclassification for amounts included in net income

 

 

 

 

 

Net change

 

1

 

 

1

 

 

Foreign currency translation adjustments

 

 

2

 

5

 

3

 

Total other comprehensive income, net of tax

 

(1

)

 

6

 

27

 

Comprehensive income

 

427

 

492

 

861

 

1,101

 

Less: Comprehensive income attributable to noncontrolling interest

 

 

 

 

1

 

Comprehensive income attributable to Seagate Technology plc

 

$

427

 

$

492

 

$

861

 

$

1,100

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5



 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

For the Six Months Ended

 

 

 

December 27,
2013

 

December 28,
2012

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

855

 

$

1,074

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

457

 

430

 

Share-based compensation

 

57

 

36

 

Deferred income taxes

 

(15

)

(11

)

Gain on sale of investments

 

(32

)

(33

)

Gain on sale of property and equipment

 

(4

)

(8

)

Loss on redemption and repurchase of debt

 

 

6

 

Other non-cash operating activities, net

 

8

 

5

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

104

 

 

Accounts receivable, net

 

51

 

683

 

Inventories

 

(94

)

156

 

Accounts payable

 

(46

)

(496

)

Accrued employee compensation

 

(68

)

(62

)

Accrued expenses, income taxes and warranty

 

41

 

(97

)

Vendor non-trade receivables

 

199

 

305

 

Other assets and liabilities

 

25

 

(12

)

Net cash provided by operating activities

 

1,538

 

1,976

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisition of property, equipment and leasehold improvements

 

(304

)

(427

)

Proceeds from the sale of property and equipment

 

 

4

 

Proceeds from the sale of strategic investments

 

72

 

42

 

Purchases of short-term investments

 

(87

)

(168

)

Sales of short-term investments

 

463

 

125

 

Maturities of short-term investments

 

61

 

21

 

Cash used in acquisition of LaCie S.A., net of cash acquired

 

 

(36

)

Other investing activities, net

 

(28

)

(14

)

Net cash provided by (used in) investing activities

 

177

 

(453

)

FINANCING ACTIVITIES

 

 

 

 

 

Repayments of long-term debt and capital lease obligations

 

 

(58

)

Net proceeds from issuance of long term debt

 

791

 

 

Repurchases of ordinary shares

 

(1,702

)

(1,510

)

Dividends to shareholders

 

(277

)

(377

)

Proceeds from issuance of ordinary shares under employee stock plans

 

61

 

168

 

Escrow deposit for acquisition of noncontrolling shares of LaCie S.A.

 

 

(72

)

Other financing activities, net

 

(5

)

 

Net cash used in financing activities

 

(1,132

)

(1,849

)

Effect of foreign currency exchange rate changes on cash and cash equivalents

 

2

 

2

 

Increase (decrease) in cash and cash equivalents

 

585

 

(324

)

Cash and cash equivalents at the beginning of the period

 

1,708

 

1,707

 

Cash and cash equivalents at the end of the period

 

$

2,293

 

$

1,383

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6



 

SEAGATE TECHNOLOGY PLC

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

For the Six Months Ended December 27, 2013

(In millions)

(Unaudited)

 

 

 

 

 

Seagate Technology plc Ordinary Shareholders

 

 

 

 

 

Total Equity

 

Number
of
Ordinary
Shares

 

Par Value
of Shares

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Loss

 

Accumulated
Deficit

 

Total

 

Noncontrolling
Interest

 

Balance at June 28, 2013

 

$

3,506

 

359

 

$

 

$

5,286

 

$

(13

)

$

(1,778

)

$

3,495

 

$

11

 

Net income

 

855

 

 

 

 

 

855

 

855

 

 

Other comprehensive income

 

6

 

 

 

 

5

 

 

5

 

1

 

Issuance of ordinary shares under employee stock plans

 

61

 

6

 

 

61

 

 

 

61

 

 

Repurchases of ordinary shares

 

(1,702

)

(37

)

 

 

 

(1,702

)

(1,702

)

 

Dividends to shareholders

 

(277

)

 

 

 

 

(277

)

(277

)

 

Share-based compensation

 

57

 

 

 

57

 

 

 

57

 

 

Purchase of additional subsidiary shares from noncontrolling interest

 

(11

)

 

 

 

1

 

 

1

 

(12

)

Balance at December 27, 2013

 

$

2,495

 

328

 

$

 

$

5,404

 

$

(7

)

$

(2,902

)

$

2,495

 

$

 

 

7



 

1.              Basis of Presentation and Summary of Significant Accounting Policies

 

Organization

 

The Company is a leading provider of data storage products. Its principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives are used as the primary medium for storing electronic data.

 

The Company produces a broad range of electronic data storage products including HDDs, solid state hybrid drives (SSHD) and solid state drives (SSD), which address enterprise applications, where its products are designed for enterprise servers, mainframes and workstations; client compute applications, where its products are designed primarily for desktop and notebook computers; and client non-compute applications, where its products are designed for a wide variety of end user devices such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems. In addition to manufacturing and selling data storage products, the Company provides data storage services for small to medium-sized businesses, including online backup, data protection and recovery solutions.

 

Basis of Presentation and Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and all its wholly-owned and majority-owned subsidiaries, after elimination of intercompany transactions and balances. The preparation of financial statements in accordance with accounting principles generally accepted in the United States also requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results the Company reports in its condensed consolidated financial statements. The condensed consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to present fairly the condensed consolidated financial position, results of operations, comprehensive income, cash flows and shareholders’ equity for the periods presented. Such adjustments are of a normal and recurring nature. The Company’s Consolidated Financial Statements for the fiscal year ended June 28, 2013, are included in its Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on August 7, 2013. The Company believes that the disclosures included in the unaudited Condensed Consolidated Financial Statements, when read in conjunction with its Consolidated Financial Statements as of June 28, 2013, and the notes thereto, are adequate to make the information presented not misleading.

 

The results of operations for the three and six months ended December 27, 2013, are not necessarily indicative of the results of operations to be expected for any subsequent interim period in the Company’s fiscal year ending June 27, 2014. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The three months ended December 27, 2013 and December 28, 2012 each consisted of 13 weeks.  Fiscal year 2014 will be comprised of 52 weeks and will end on June 27, 2014.

 

Summary of Significant Accounting Policies

 

Other than the revised presentation of accumulated other comprehensive income described below, there have been no  significant changes in our significant accounting policies. Please refer to Note 1 of “Financial Statements and Supplementary Data” contained in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2013, as filed with the SEC on August 7, 2013 for a discussion of the Company’s other significant accounting policies.

 

Recently Issued Accounting Pronouncements

 

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (ASC Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires an entity to report information, either on the face of the statement where net income is presented or in the notes, about the amounts reclassified out of accumulated other comprehensive income by component and to report significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income.  The ASU has been adopted by the Company effective for the first quarter of fiscal year 2014.  Other than requiring additional disclosures, the adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

 

In July, 2013, the FASB issued ASU No. 2013-11, Income Taxes (ASC Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this ASU provide explicit guidance that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax

 

8



 

loss, or a tax credit carryforward, with limited exceptions. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and do not require new recurring disclosures. The adoption of this new guidance will not have a material impact on the Company’s consolidated financial statements.

 

2.              Balance Sheet Information

 

Investments

 

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of December 27, 2013:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

970

 

$

 

$

970

 

Commercial paper

 

909

 

 

909

 

Corporate bonds

 

5

 

 

5

 

U.S. treasuries and agency bonds

 

 

 

 

Certificates of deposit

 

131

 

 

131

 

Auction rate securities

 

17

 

(2

)

15

 

Equity securities

 

 

 

 

Other debt securities

 

 

 

 

 

 

2,032

 

(2

)

2,030

 

Trading securities

 

 

 

 

Total

 

$

2,032

 

$

(2

)

$

2,030

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

1,965

 

Included in Short-term investments

 

 

 

 

 

46

 

Included in Restricted cash and investments

 

 

 

 

 

4

 

Included in Other assets, net

 

 

 

 

 

15

 

Total

 

 

 

 

 

$

2,030

 

 

As of  December 27, 2013, the Company’s Restricted cash and investments consisted of  $4 million in cash and investments held as collateral at banks for various performance obligations.   As of June 28, 2013, the Company’s Restricted cash and investments consisted of $79 million in cash equivalents and investments held in trust for payment of its non-qualified deferred compensation plan liabilities and $22 million in cash and investments held as collateral at banks for various performance obligations. The Restricted cash and investment balance decreased as restrictions on the cash and investments were removed during the quarter.

 

The Company’s available-for-sale securities include investments in auction rate securities. Beginning in fiscal year 2008, the Company’s auction rate securities failed to settle at auction and have continued to fail through December 27, 2013. Since the Company continues to earn interest on its auction rate securities at the maximum contractual rate, there have been no payment defaults with respect to such securities, and they are all collateralized, the Company expects to recover the entire amortized cost basis of these auction rate securities. The Company does not intend to sell these securities and has concluded it is not more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. As such, the Company believes the impairments totaling $2 million are not other-than-temporary and therefore have been recorded in Accumulated other comprehensive loss. Given the uncertainty as to when the liquidity issues associated with these securities will improve, these securities are classified within Other assets, net in the Company’s Condensed Consolidated Balance Sheets.

 

As of December 27, 2013, with the exception of the Company’s auction rate securities, the Company had no available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined no available-for-sale securities were other-than-temporarily impaired as of December 27, 2013.

 

9



 

The fair value and amortized cost of the Company’s investments classified as available-for-sale at December 27, 2013, by remaining contractual maturity were as follows:

 

(Dollars in millions)

 

Amortized
Cost

 

Fair
Value

 

Due in less than 1 year

 

$

2,015

 

$

2,015

 

Due in 1 to 5 years

 

 

 

Thereafter

 

17

 

15

 

Total

 

$

2,032

 

$

2,030

 

 

Equity securities which do not have a contractual maturity date are not included in the above table.

 

The following table summarizes, by major type, the fair value and amortized cost of the Company’s investments as of June 28, 2013:

 

(Dollars in millions)

 

Amortized
Cost

 

Unrealized
Gain/(Loss)

 

Fair
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

Money market funds

 

$

804

 

$

 

$

804

 

Commercial paper

 

655

 

 

655

 

Corporate bonds

 

211

 

 

211

 

U.S. treasuries and agency bonds

 

96

 

 

96

 

Certificates of deposit

 

154

 

 

154

 

Auction rate securities

 

17

 

(2

)

15

 

Equity Securities

 

4

 

 

4

 

Other debt securities

 

107

 

(1

)

106

 

 

 

2,048

 

(3

)

2,045

 

Trading securities

 

74

 

5

 

79

 

Total

 

$

2,122

 

$

2

 

$

2,124

 

 

 

 

 

 

 

 

 

Included in Cash and cash equivalents

 

 

 

 

 

$

1,528

 

Included in Short-term investments

 

 

 

 

 

480

 

Included in Restricted cash and investments

 

 

 

 

 

101

 

Included in Other assets, net

 

 

 

 

 

15

 

Total

 

 

 

 

 

$

2,124

 

 

As of June 28, 2013, with the exception of the Company’s auction rate securities, the Company had no material available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined no available-for-sale securities were other-than-temporarily impaired as of June 28, 2013.

 

Inventories

 

(Dollars in millions)

 

December 27,
2013

 

June 28,
2013

 

Raw materials and components

 

$

254

 

$

213

 

Work-in-process

 

255

 

231

 

Finished goods

 

439

 

410

 

 

 

$

948

 

$

854

 

 

10



 

Other Current Assets

 

(Dollars in millions)

 

December 27,
2013

 

June 28,
2013

 

Vendor non-trade receivables

 

$

130

 

$

329

 

Other

 

137

 

155

 

 

 

$

267

 

$

484

 

 

Other current assets include non-trade receivables from certain manufacturing vendors resulting from the sale of components to these vendors who manufacture completed sub-assemblies or finished goods for the Company. The Company does not reflect the sale of these components in revenue and does not recognize any profits on these sales. The costs of the completed sub-assemblies are included in inventory upon purchase from the vendors.

 

Property, Equipment and Leasehold Improvements, net

 

(Dollars in millions)

 

December 27,
2013

 

June 28,
2013

 

Property, equipment and leasehold improvements

 

$

8,727

 

$

8,544

 

Accumulated depreciation and amortization

 

(6,599

)

(6,275

)

 

 

$

2,128

 

$

2,269

 

 

Accumulated Other Comprehensive Income (Loss) (“AOCI”)

 

The components of AOCI, net of tax, were as follows:

 

(Dollars in millions)

 

Unrealized
Gains (Losses)
on Cash Flow
Hedges

 

Unrealized Gains
(Losses) on
Marketable
Securities (a)

 

Unrealized gains
(losses) on post-
retirements

 

Foreign currency
translation
adjustments

 

Total

 

Balance as of June 28, 2013

 

$

 

$

(3

)

$

(10

)

$

 

$

(13

)

Other comprehensive income before reclassifications

 

(1

)

1

 

1

 

5

 

6

 

Amounts reclassified from AOCI

 

 

 

 

 

 

Other comprehensive income

 

(1

)

1

 

1

 

5

 

6

 

Balance as of December 27, 2013

 

$

(1

)

$

(2

)

$

(9

)

$

5

 

$

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 29, 2012

 

$

 

$

(1

)

$

(8

)

$

 

$

(9

)

Other comprehensive income before reclassifications

 

 

23

 

 

3

 

26

 

Amounts reclassified from AOCI

 

 

1

 

 

 

1

 

Other comprehensive income

 

 

24

 

 

3

 

27

 

Balance as of December 28, 2012

 

$

 

$

23

 

$

(8

)

$

3

 

$

18

 

 


(a)           The cost of a security sold or the amount reclassified out of AOCI into earnings was determined using specific identification.

 

11



 

3.              Debt

 

Short-Term Borrowings

 

On January 18, 2011, the Company and its subsidiary, Seagate HDD Cayman (“the Borrower”), entered into a Credit Agreement which provided a $350 million senior secured revolving credit facility (the “Revolving Credit Facility”). On April 30, 2013, the Company and Seagate HDD Cayman entered into the Second Amendment to the Credit Agreement which increased the commitments available under the Revolving Credit Facility from $350 million to $500 million. The Company and certain of its material subsidiaries fully and unconditionally guarantee the Revolving Credit Facility. The Revolving Credit Facility matures in April 2018, and is available for cash borrowings and for the issuance of letters of credit up to a sub-limit of $75 million. As of December 27, 2013, no borrowings had been drawn under the Revolving Credit Facility, and $2 million had been utilized for letters of credit.

 

Long-Term Debt

 

$800 million Aggregate Principal Amount of 3.75% Senior Notes due November 2018 (the “Notes”).  On November 5, 2013, Seagate HDD Cayman, issued $800 million in aggregate principal amount of 3.75% Senior Notes, which mature on November 15, 2018, in a private placement. The interest on the Notes is payable semi-annually on May 15 and November 15 of each year. The Notes are redeemable at the option of Seagate HDD Cayman in whole or in part, on not less than 30, nor more than 60 days’ notice, at a “make-whole” premium redemption price. The “make-whole” premium redemption price will be equal to the greater of (1) 100% of the principal amount of the notes being redeemed, or (2) the sum of the present values of the remaining schedule payments of principal and interest on the Notes being redeemed, discounted at the redemption date on a semi-annual basis at a rate equal to the sum of the applicable Treasury rate plus 50 basis points basis points. Accrued and unpaid interest, if any will be paid to, but excluding, the redemption date. The Notes are fully and unconditionally guaranteed by the Company on a senior unsecured basis. Seagate HDD Cayman and the Company are required to exchange the Notes for notes registered under the under the Securities Act of 1933, as amended, by January 30, 2015 if the Notes have not otherwise become freely transferable by that time.

 

$600 million Aggregate Principal Amount of 6.8% Senior Notes due October 2016 (the “2016 Notes”). The interest on the 2016 Notes is payable semi-annually on April 1 and October 1 of each year. The issuer under the 2016 Notes is Seagate HDD Cayman, and the obligations under the 2016 Notes are unconditionally guaranteed by certain of the Company’s significant subsidiaries.

 

$750 million Aggregate Principal Amount of 7.75% Senior Notes due December 2018 (the “2018 Notes”). The interest on the 2018 Notes is payable semi-annually on June 15 and December 15 of each year. The issuer under the 2018 Notes is Seagate HDD Cayman and the obligations under the 2018 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

$600 million Aggregate Principal Amount of 6.875% Senior Notes due May 2020 (the “2020 Notes”). The interest on the 2020 Notes is payable semi-annually on May 1 and November 1 of each year. The issuer under the 2020 Notes is Seagate HDD Cayman, and the obligations under the 2020 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

$600 million Aggregate Principal Amount of 7.00% Senior Notes due November 2021 (the “2021 Notes”). The interest on the 2021 Notes is payable semi-annually on January 1 and July 1 of each year. The issuer under the 2021 Notes is Seagate HDD Cayman and the obligations under the 2021 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by certain of the Company’s significant subsidiaries.

 

$1 billion Aggregate Principal Amount of 4.75% Senior Notes due June 1, 2023 (the “2023 Notes”). The interest on the 2023 Notes is payable semi-annually on June 1 and December 1 of each year. The issuer under the 2023 Notes is Seagate HDD Cayman and the obligations under the 2023 Notes are fully and unconditionally guaranteed, on a senior unsecured basis, by the Company.

 

Other As part of our acquisition of LaCie S.A., $6 million of long-term debt was assumed. The outstanding balance was fully paid off during the three months ended December 27, 2013.  The outstanding balance at June 28, 2013 was $3 million and was classified as Current portion of long-term debt.

 

12



 

At December 27, 2013, future principal payments on long-term debt were as follows (in millions):

 

Fiscal Year

 

 

 

Remainder of 2014

 

$

 

2015

 

 

2016

 

 

2017

 

334

 

2018

 

 

Thereafter

 

3,238

 

 

 

$

3,572

 

 

4.              Income Taxes

 

The Company recorded an income tax provision of $14 million and $27 million in the three and six months ended December 27, 2013, respectively. The income tax provision recorded for the three and six months ended December 27, 2013 included approximately $4 million and $6 million, respectively, of net discrete tax expense primarily related to increases in income tax reserves recorded for non-U.S. income positions taken in prior fiscal years offset by the tax benefits from the reversal of a portion of the U.S. valuation allowance recorded in prior periods and tax benefits associated with the release of tax reserves associated with the expiration of certain statutes of limitation.

 

The Company’s income tax provision recorded for the three and six months ended December 27, 2013 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain U.S. deferred tax assets.

 

The IRS and Treasury Department on September 13, 2013, released final regulations under Sections 162(a) and 263(a) on the deduction and capitalization of expenditures related to tangible personal property (the final repair regulations).  The entirety of the final repair regulations apply to the Company’s first quarter of fiscal year 2015.  Application of these regulations is not expected to have a material impact on the Company’s consolidated financial statements.

 

During the six months ended December 27, 2013, the Company’s unrecognized tax benefits excluding interest and penalties increased by $16 million to $173 million. The unrecognized tax benefits that, if recognized, would impact the effective tax rate was $173 million at December 27, 2013, subject to certain future valuation allowance reversals. During the 12 months beginning December 28, 2013, the Company expects to reduce its unrecognized tax benefits by approximately zero to $30 million primarily as a result of the completion of various audit cycles and the expiration of certain statutes of limitation.

 

The income tax provision of $7 million recorded for the three months ended December 28, 2012 included approximately$6 million of discrete tax benefits primarily from the release of tax reserves associated with the expiration of certain statutes of limitation. The income tax provision of $25 million recorded for the six months ended December 28, 2012 included approximately $1 million of net discrete tax expense primarily associated with the reversal of prior period tax benefits offset by the release of tax reserves associated with the expiration of certain statutes of limitation.

 

The Company’s income tax provision recorded for the three and six months ended December 28, 2012 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain U.S. deferred tax assets.

 

5.              Acquisitions

 

LaCie S.A.

 

On August 3, 2012 the Company acquired 23,382,904 (or approximately 64.5%) of the outstanding shares of LaCie S.A. (“LaCie”) for a price of €4.05 per share with a price supplement of €0.12 per share, which would have been payable if the Company had successfully acquired at least 95% of the outstanding shares of LaCie within 6 months of the acquisition. Of the amount paid at the acquisition date, €9 million is treated as compensation cost to one of the selling shareholders, who is now an

 

13



 

employee of the Company, to be recognized over a period of 36 months from the acquisition date, and may be refunded to the Company if the selling shareholder is no longer employed at the end of that period. The transaction and related agreements are expected to accelerate the Company’s growth strategy in the expanding consumer storage market, particularly in Europe, Japan and in premium distribution channels.

 

The acquisition-date fair value of the consideration transferred for the business combination totaled $111 million, including cash paid of $107 million, and contingent consideration of $4 million.

 

The following table summarizes the estimated fair values of the assets acquired, liabilities assumed, and noncontrolling interest at the acquisition date (in millions):

 

Cash and cash equivalents

 

$

71

 

Accounts receivable

 

29

 

Marketable securities

 

27

 

Inventories

 

46

 

Other current and non-current assets

 

19

 

Property, plant and equipment

 

12

 

Intangible assets

 

45

 

Goodwill

 

13

 

Total assets

 

262

 

Accounts payable and accrued expenses

 

(73

)

Current and non-current portion of long-term debt

 

(6

)

Total liabilities

 

(79

)

Noncontrolling interest

 

(72

)

Total

 

$

111

 

 

The following table shows the fair value of the separately identifiable intangible assets at the time of acquisition and the period over which each intangible asset will be amortized:

 

(Dollars in millions)

 

Fair Value

 

Weighted-
Average
Amortization
Period

 

Customer relationships

 

$

31

 

5.0 years

 

Existing technology

 

1

 

5.0 years

 

Trade name

 

13

 

5.0 years

 

Total acquired identifiable intangible assets

 

$

45

 

 

 

 

Since the acquisition date, the Company recorded adjustments to the fair value of certain assets acquired and liabilities assumed with LaCie S.A. that resulted in a net increase of $1 million to Goodwill, and a corresponding decrease in Intangible assets.

 

The goodwill recognized is attributable primarily to the benefits the Company expects to derive from LaCie’s brand recognition and the acquired workforce, and is not deductible for income tax purposes. The acquisition date fair value of the noncontrolling interest is based on the market price of their publicly traded shares as of the first trading date subsequent to the acquisition, as the shares did not trade on the acquisition date.

 

The €0.12 supplement was not paid as 95% of the LaCie business was not  acquired within six months of the acquisition date, resulting in a reversal of the contingent consideration liability which was recorded as a reduction of Marketing and administrative expenses of $4 million.

 

The amounts of revenue and earnings of LaCie included in the Company’s Condensed Consolidated Statement of Operations from the acquisition date are not significant.

 

The Company deposited $72 million into an escrow account with the intention of acquiring the remaining publicly held shares of LaCie through public and private transactions. As of December 27, 2013, the Company had completed the acquisition

 

14



 

of all outstanding shares. The use of this deposit is treated as a non-cash financing activity and excluded from the Statement of Cash Flows.

 

6.              Goodwill and Other Intangible Assets

 

The changes in the carrying amount of goodwill for the three months ended December 27, 2013, are as follows:

 

(Dollars in millions)

 

 

 

Balance as of June 28, 2013

 

$

476

 

Foreign currency translation effect

 

1

 

Balance as of December 27, 2013

 

$

477

 

 

The carrying value of other intangible assets subject to amortization as of December 27, 2013, is set forth in the following table:

 

(Dollars in millions)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Weighted Average
Remaining Useful Life

 

Existing technology

 

$

138

 

$

(137

)

$

1

 

3.6 years

 

Customer relationships

 

431

 

(152

)

279

 

3.8 years

 

Trade name

 

14

 

(4

)

10

 

3.6 years

 

In-process research and development (a)

 

44

 

(5

)

39

 

1.5 years

 

Total amortizable other intangible assets

 

$

627

 

$

(298

)

$

329

 

3.5 years

 

 


(a)           During the December 2013 quarter, the in-process research and development was completed, and the related asset was accounted for as a finite-lived intangible asset.

 

The carrying value of other intangible assets subject to amortization as of June 28, 2013 is set forth in the following table:

 

(Dollars in millions)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Weighted Average
Remaining Useful Life

 

Existing technology

 

$

138

 

$

(105

)

$

33

 

0.5 years

 

Customer relationships

 

431

 

(114

)

317

 

4.3 years

 

Trade Name

 

14

 

(3

)

11

 

4.1 years

 

Total amortizable other intangible assets

 

$

583

 

$

(222

)

$

361

 

3.9 years

 

 

For the three and six months ended December 27, 2013, amortization expense of other intangible assets was $39 million and $76 million, respectively. For the three and six months ended December 28, 2012, amortization expense of other intangible assets was $37 million and $73 million. As of December 27, 2013, expected amortization expense for other intangible assets for each of the next five years and thereafter is as follows:

 

(Dollars in millions)

 

 

 

Remainder of 2014

 

$

52

 

2015

 

102

 

2016

 

79

 

2017

 

68

 

2018

 

28

 

Thereafter

 

 

 

 

$

329

 

 

15



 

7.              Derivative Financial Instruments

 

The Company is exposed to foreign currency exchange rate, interest rate, and to a lesser extent, equity price risks relating to its ongoing business operations. The Company enters into foreign currency forward exchange contracts to manage the foreign currency exchange rate risk on forecasted expenses denominated in foreign currencies and to mitigate the remeasurement risk of certain foreign currency denominated liabilities. The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The changes in the fair values of the effective portions of designated cash flow hedges are recorded in Accumulated other comprehensive loss until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through earnings. The amount of net unrealized gains (losses) on cash flow hedges was not material as of December 27, 2013 and June 28, 2013.

 

The Company dedesignates its cash flow hedges when the forecasted hedged transactions are realized or it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in Accumulated other comprehensive loss are reclassified immediately into earnings and any subsequent changes in the fair value of such derivative instruments are immediately reflected in earnings. The Company did not recognize any material net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three and six months ended December 27, 2013. As of December 27, 2013, the Company’s existing foreign currency forward exchange contracts mature within 12 months. The deferred amount currently recorded in Accumulated other comprehensive loss expected to be recognized into earnings over the next 12 months is immaterial.

 

The following tables show the total notional value of the Company’s outstanding foreign currency forward exchange contracts as of December 27, 2013 and June 28, 2013:

 

 

 

As of December 27, 2013

 

(Dollars in millions)

 

Contracts
Designated as
Hedges

 

Contracts Not
Designated as
Hedges

 

Thai baht

 

$

 

$

18

 

Singapore dollars

 

97

 

21

 

Chinese renminbi

 

 

 

 

 

$

97

 

$

39

 

 

 

 

As of June 28, 2013

 

(Dollars in millions)

 

Contracts
Designated as
Hedges

 

Contracts Not
Designated as
Hedges

 

Thai baht

 

$

 

$

20

 

Singapore dollars

 

 

 

Chinese renminbi

 

 

 

Czech koruna

 

 

 

 

 

$

 

$

20

 

 

The Company is subject to equity market risks due to changes in the fair value of the notional investments selected by its employees as part of its Non-qualified Deferred Compensation Plan—the Seagate Deferred Compensation Plan (the “SDCP”). In the quarter ended December 27, 2013, the Company entered into a Total Return Swap (TRS) in order to manage the equity market risks associated with the SDCP liabilities. The Company pays a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liability due to changes in the value of the investment options made by employees. As of December 27, 2013, the notional investments underlying the TRS amounted to $87 million. The contract term of the TRS is approximately one year and is settled on a monthly basis, therefore limiting counterparty performance risk. The Company did not designate the TRS as a hedge. Rather, the Company records all changes in the fair value of the TRS to earnings to offset the market value changes of the SDCP liabilities.

 

16



 

The following table shows the Company’s derivative instruments measured at fair value as reflected in the Condensed Consolidated Balance Sheet as of December 27, 2013 and June 28, 2013:

 

 

 

As of December 27, 2013

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

 

Accrued expenses

 

$

(1

)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

 

Accrued expenses

 

(1

)

Total return swap

 

Other current assets

 

 

Accrued expenses

 

 

Total derivatives

 

 

 

$

 

 

 

$

(2

)

 

 

 

As of June 28, 2013

 

 

 

Asset Derivatives

 

Liability Derivatives

 

(Dollars in millions)

 

Balance Sheet
Location

 

Fair Value

 

Balance Sheet
Location

 

Fair Value

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

$

 

Accrued expenses

 

$

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward exchange contracts

 

Other current assets

 

 

Accrued expenses

 

(1

)

Total derivatives

 

 

 

$

 

 

 

$

(1

)

 

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statement of Comprehensive Income and the Condensed Consolidated Statement of Operations for the three and six months ended December 27, 2013:

 

(Dollars in millions)

 

 

 

Amount of
Gain or (Loss)
Recognized in OCI
on Derivative
(Effective Portion)

 

Location of
Gain or (Loss)
Reclassified from
Accumulated OCI

 

Amount of
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)

 

Location of
Gain or (Loss)
Recognized in Income
on Derivative
(Ineffective Portion and

 

Amount of
Gain or (Loss)
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (a)

 

Derivatives Designated as
Hedging Instruments

 

For the Three
Months Ended

 

For the Six
Months Ended

 

into Income
(Effective Portion)

 

For the Three
Months Ended

 

For the Six
Months Ended

 

Amount Excluded from
Effectiveness Testing)

 

For the Three
Months Ended

 

For the Six
Months Ended

 

Foreign currency forward exchange contracts

 

$

(1

)

$

 

Cost of revenue

 

$

 

$

 

Cost of revenue

 

$

 

$

 

 

 

 

Location of
Gain or (Loss)
Recognized in

 

Amount of
Gain or (Loss)
Recognized in Income
on Derivative

 

Derivatives Not Designated as Hedging Instruments

 

Income on
Derivative

 

For the Three
Months Ended

 

For the Six Months
Ended

 

Foreign currency forward exchange contracts

 

Other, net

 

$

(4

)

$

(5

)

 


(a)                   The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationship and $0 related to the amount excluded from the assessment of hedge effectiveness for the three and six months ended December 27, 2013.

 

17



 

The following tables show the effect of the Company’s derivative instruments on the Condensed Consolidated Statement of Comprehensive Income and the Condensed Consolidated Statement of Operations for the three and six months ended December 28, 2012:

 

(Dollars in millions)

 

 

 

Amount of
Gain or (Loss)
Recognized in OCI
on Derivative
(Effective Portion)

 

Location of
Gain or (Loss)
Reclassified from

 

Amount of
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)

 

Location of
Gain or (Loss)
Recognized in Income
on Derivative

 

Amount of
Gain or (Loss)
Recognized in Income
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing) (a)

 

Derivatives Designated as
Hedging Instruments

 

For the Three
Months Ended

 

For the Six
Months
Ended

 

Accumulated OCI
into Income
(Effective Portion)

 

For the Three
Months Ended

 

For the Six
Months Ended

 

(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)

 

For the Three
Months Ended

 

For the Six
Months Ended

 

Foreign currency forward exchange contracts

 

$

 

$

 

Cost of revenue

 

$

 

$

 

Cost of revenue

 

$

 

$

 

 

 

 

Location of
Gain or (Loss)
Recognized in

 

Amount of
Gain or (Loss)
Recognized in Income
on Derivative

 

Derivatives Not Designated as Hedging Instruments

 

Income on
Derivative

 

For the Three Months
Ended

 

For the Six Months
Ended

 

Foreign currency forward exchange contracts

 

Other, net

 

$

1

 

$

3

 

 


(a)                   The amount of gain or (loss) recognized in income represents $0 related to the ineffective portion of the hedging relationship and $0 related to the amount excluded from the assessment of hedge effectiveness for the three and six months ended December 28, 2012, respectively.

 

8.              Fair Value

 

Measurement of Fair Value

 

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

Fair Value Hierarchy

 

A fair value hierarchy is based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflects the Company’s own assumptions of market participant valuation (unobservable inputs). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs that may be used to measure fair value:

 

Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 — Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; or

 

Level 3 — Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.

 

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate the Company’s or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.

 

18



 

Items Measured at Fair Value on a Recurring Basis

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of December 27, 2013:

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

970

 

$

 

$

 

$

970

 

Commercial paper

 

 

909

 

 

909

 

U.S. treasuries and agency bonds

 

 

 

 

 

Certificates of deposit

 

 

127

 

 

127

 

Corporate bonds

 

 

5

 

 

5

 

Other debt securities

 

 

 

 

 

Equity securities

 

 

 

 

 

Total cash equivalents and short-term investments

 

970

 

1,041

 

 

2,011

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Mutual Funds

 

 

 

 

 

Certificates of deposit

 

 

4

 

 

4

 

Auction rate securities

 

 

 

15

 

15

 

Derivative assets

 

 

 

 

 

Total assets

 

$

970

 

$

1,045

 

$

15

 

$

2,030

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

(2

)

$

 

$

(2

)

Total return swap

 

 

 

 

 

Total liabilities

 

$

 

$

(2

)

$

 

$

(2

)

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

970

 

$

995

 

$

 

$

1,965

 

Short-term investments

 

 

46

 

 

46

 

Restricted cash and investments

 

 

4

 

 

4

 

Other current assets

 

 

 

 

 

Other assets, net

 

 

 

15

 

15

 

Total assets

 

$

970

 

$

1,045

 

$

15

 

$

2,030

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(2

)

$

 

$

(2

)

Total liabilities

 

$

 

$

(2

)

$

 

$

(2

)

 

19



 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, excluding accrued interest components, as of June 28, 2013:

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

787

 

$

 

$

 

$

787

 

Commercial paper

 

 

 

655

 

 

655

 

U.S. treasuries and agency bonds

 

 

96

 

 

96

 

Certificates of deposit

 

 

149

 

 

149

 

Corporate bonds

 

 

211

 

 

211

 

Other debt securities

 

 

106

 

 

106

 

Equity securities

 

4

 

 

 

4

 

Total cash equivalents and short-term investments

 

791

 

1,217

 

 

2,008

 

Restricted cash and investments:

 

 

 

 

 

 

 

 

 

Mutual Funds

 

74

 

 

 

74

 

Other debt securities

 

22

 

5

 

 

27

 

Auction rate securities

 

 

 

15

 

15

 

Derivative assets

 

 

 

 

 

Total assets

 

$

887

 

$

1,222

 

$

15

 

$

2,124

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

 

$

(1

)

$

 

$

(1

)

Total liabilities

 

$

 

$

(1

)

$

 

$

(1

)

 

 

 

Fair Value Measurements at Reporting Date Using

 

(Dollars in millions)

 

Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Balance

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

787

 

$

741

 

$

 

$

1,528

 

Short-term investments

 

4

 

476

 

 

480

 

Restricted cash and investments

 

96

 

5

 

 

101

 

Other current assets

 

 

 

 

 

Other assets, net

 

 

 

15

 

15

 

Total assets

 

$

887

 

$

1,222

 

$

15

 

$

2,124

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses

 

$

 

$

(1

)

$

 

$

(1

)

Total liabilities

 

$

 

$

(1

)

$

 

$

(1

)

 

Level 1 assets consist of securities for which quoted prices are available in an active market.

 

20



 

The Company classifies items in Level 2 if the financial asset or liability is valued using observable inputs. The Company uses observable inputs including quoted prices in active markets for similar assets or liabilities. Level 2 assets include: agency bonds, corporate bonds, commercial paper, municipal bonds, certificates of deposit, international government securities, asset backed securities, mortgage backed securities and U.S. Treasuries. These debt investments are priced using observable inputs and valuation models which vary by asset class. The Company uses a pricing service to assist in determining the fair values of all of its cash equivalents and short-term investments. For the cash equivalents and short-term investments in the Company’s portfolio, multiple pricing sources are generally available. The pricing service uses inputs from multiple industry standard data providers or other third party sources and various methodologies, such as weighting and models, to determine the appropriate price at the measurement date. The Company corroborates the prices obtained from the pricing service against other independent sources and, as of December 27, 2013, has not found it necessary to make any adjustments to the prices obtained. The Company’s derivative financial instruments are also classified within Level 2. The Company’s derivative financial instruments consist of foreign currency forward exchange contracts. The Company recognizes derivative financial instruments in its condensed consolidated financial statements at fair value. The Company determines the fair value of these instruments by considering the estimated amount it would pay or receive to terminate these agreements at the reporting date.

 

The Company’s Level 3 assets consist of auction rate securities with a par value of approximately $17 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in fiscal year 2008, these securities failed to settle at auction and have continued to fail through December 27, 2013. Since there is no active market for these securities, the Company valued them using a discounted cash flow model. The valuation model is based on the income approach and reflects both observable and significant unobservable inputs.

 

The Company’s auction rate securities are measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3).  The fair value of the Company’s auction rate securities as of December 27, 2013 and June 28, 2013 totaled $15 million and $15 million, respectively.

 

Items Measured at Fair Value on a Non-Recurring Basis

 

The Company enters into certain strategic investments for the achievement of business and strategic objectives. Strategic investments in equity securities where the Company does not have the ability to exercise significant influence over the investees, are included in Other assets, net in the Condensed Consolidated Balance Sheets, are recorded at cost and are periodically analyzed to determine whether or not there are indicators of impairment. The carrying value of the Company’s strategic investments at December 27, 2013 and June 28, 2013 totaled $44 million and $66 million, respectively, and consisted primarily of privately held equity securities without a readily determinable fair value.

 

Other Fair Value Disclosures

 

The Company’s debt is carried at amortized cost. The fair value of the Company’s debt is derived using the closing price as of the date of valuation, which takes into account the yield curve, interest rates, and other observable inputs. Accordingly, these fair value measurements are categorized as Level 2. The following table presents the fair value and amortized cost of the Company’s debt in order of maturity:

 

 

 

December 27, 2013

 

June 28, 2013

 

(Dollars in millions)

 

Carrying
Amount

 

Estimated
Fair Value

 

Carrying
Amount

 

Estimated
Fair Value

 

6.8% Senior Notes due October 2016

 

$

334

 

$

378

 

$

335

 

$

370

 

3.75% Senior Notes due November 2018

 

800

 

811

 

 

 

7.75% Senior Notes due December 2018

 

238

 

261

 

238

 

259

 

6.875% Senior Notes due May 2020

 

600

 

649

 

600

 

644

 

7.00% Senior Notes due November 2021

 

600

 

664

 

600

 

645

 

4.75% Senior Notes due June 2023

 

1,000

 

937

 

1,000

 

938

 

Other

 

 

 

4

 

4

 

 

 

3,572

 

3,700

 

2,777

 

2,860

 

Less short-term borrowings and current portion of long-term debt

 

 

 

(3

)

(3

)

Long-term debt, less current portion

 

$

3,572

 

$

3,700

 

$

2,774

 

$

2,857

 

 

21



 

9.              Equity

 

Share Capital

 

The Company’s authorized share capital is $13,500 and consists of 1,250,000,000 ordinary shares, par value $0.00001, of which 328,474,485 shares were outstanding as of December 27, 2013, and 100,000,000 preferred shares, par value $0.00001, of which none were issued or outstanding as of December 27, 2013.

 

Ordinary shares—Holders of ordinary shares are entitled to receive dividends when and as declared by the Company’s board of directors (the “Board of Directors”). Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of preferred shares, any remaining assets of the Company will be distributed ratably to holders of the preferred and ordinary shares. Holders of shares are entitled to one vote per share on all matters upon which the ordinary shares are entitled to vote, including the election of directors.

 

Preferred shares—The Company may issue preferred shares in one or more series, up to the authorized amount, without shareholder approval. The Board of Directors is authorized to establish from time to time the number of shares to be included in each series, and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. The Board of Directors can also increase or decrease the number of shares of a series, but not below the number of shares of that series then outstanding, without any further vote or action by the shareholders.

 

The Board of Directors may authorize the issuance of preferred shares with voting or conversion rights that could harm the voting power or other rights of the holders of the ordinary shares. The issuance of preferred shares, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of the Company and might harm the market price of its ordinary shares and the voting and other rights of the holders of ordinary shares.

 

Repurchases of Equity Securities

 

On April 26, 2012, the Board of Directors authorized the Company to repurchase $2.5 billion of its outstanding ordinary shares.

 

On July 24, 2013, the Board of Directors authorized the Company to repurchase an additional $2.5 billion of its outstanding ordinary shares.

 

All repurchases are effected as redemptions in accordance with the Company’s Articles of Association.

 

As of December 27, 2013, $1.7 billion remained available for repurchase under the existing repurchase authorization limit.

 

The following table sets forth information with respect to repurchases of the Company’s shares during the six months ended December 27, 2013:

 

(In millions)

 

Number of
Shares
Repurchased

 

Dollar Value
of Shares
Repurchased

 

Repurchased during the three months ended September 27, 2013

 

4

 

$

182

 

Repurchased during the three months ended December 27, 2013

 

33

 

$

1,520

 

Repurchased during the six months ended December 27, 2013

 

37

 

$

1,702

 

 

10.       Compensation

 

The Company recorded approximately $30 million and $57 million of stock-based compensation expense during the three and six months ended December 27, 2013, respectively. The Company recorded approximately $19 million and $36 million of stock-based compensation during the three and six months ended December 28, 2012, respectively.

 

22



 

11.       Guarantees

 

Indemnifications to Officers and Directors

 

On May 4, 2009, Seagate Technology, an exempted company incorporated with limited liability under the laws of the Cayman Islands (“Seagate-Cayman”), then the parent company, entered into a new form of indemnification agreement (the “Revised Indemnification Agreement”) with its officers and directors of Seagate-Cayman and its subsidiaries (each, an “Indemnitee”). The Revised Indemnification Agreement provides indemnification in addition to any of Indemnitee’s indemnification rights under Seagate-Cayman’s Articles of Association, applicable law or otherwise, and indemnifies an Indemnitee for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts actually and reasonably incurred by him or her in any action or proceeding, including any action by or in the right of Seagate-Cayman or any of its subsidiaries, arising out of his or her service as a director, officer, employee or agent of Seagate-Cayman or any of its subsidiaries or of any other entity to which he or she provides services at Seagate-Cayman’s request. However, an Indemnitee shall not be indemnified under the Revised Indemnification Agreement for (i) any fraud or dishonesty in the performance of Indemnitee’s duty to Seagate-Cayman or the applicable subsidiary of Seagate-Cayman or (ii) Indemnitee’s conscious, intentional or willful failure to act honestly, lawfully and in good faith with a view to the best interests of Seagate-Cayman or the applicable subsidiary of Seagate-Cayman. In addition, the Revised Indemnification Agreement provides that Seagate-Cayman will advance expenses incurred by an Indemnitee in connection with enforcement of the Revised Indemnification Agreement or with the investigation, settlement or appeal of any action or proceeding against him or her as to which he or she could be indemnified.

 

On July 3, 2010 pursuant to a corporate reorganization, the common shareholders of Seagate-Cayman became ordinary shareholders of Seagate Technology PLC (the Company) and Seagate-Cayman became a wholly owned subsidiary of the Company, as described more fully in the Current Report on Form 8-K filed by the Company on July 6, 2010 (the “Redomestication”). On July 27, 2010, in connection with the Redomestication, the Company, as sole shareholder of Seagate-Cayman, approved a form of deed of indemnity (the “Deed of Indemnity”), which provides for the indemnification by Seagate-Cayman of any director, officer, employee or agent of the Company, Seagate-Cayman or any subsidiary of the Company (each, a “Deed Indemnitee”), in addition to any of a Deed Indemnitee’s indemnification rights under the Company’s Articles of Association, applicable law or otherwise, with a similar scope to the Revised Indemnification Agreement. Seagate-Cayman entered into the Deed of Indemnity with certain Deed Indemnitees effective as of July 3, 2010 and continues to enter into the Deed of Indemnity with additional Deed Indemnitees from time to time.

 

The nature of these indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay on behalf of its officers and directors. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification obligations.

 

Intellectual Property Indemnification Obligations

 

The Company has entered into agreements with customers and suppliers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.

 

23



 

Product Warranty

 

The Company estimates probable product warranty costs at the time revenue is recognized. The Company generally warrants its products for a period of 1 to 5 years. The Company uses estimated repair or replacement costs and uses statistical modeling to estimate product return rates in order to determine its warranty obligation. Changes in the Company’s product warranty liability during the three and six months ended December 27, 2013 and December 28, 2012 were as follows:

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(Dollars in millions)

 

December 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Balance, beginning of period

 

$

318

 

$

337

 

$

320

 

$

363

 

Warranties issued

 

48

 

50

 

96

 

98

 

Repairs and replacements

 

(61

)

(67

)

(119

)

(151

)

Changes in liability for pre-existing warranties, including expirations

 

(5

)

10

 

3

 

17

 

Warranty liability assumed from business acquisitions

 

 

 

 

3

 

Balance, end of period

 

$

300

 

$

330

 

$

300

 

$

330

 

 

12.       Earnings Per Share

 

Basic earnings per share is computed by dividing income available to shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing income available to shareholders by the weighted-average number of shares outstanding during the period and the number of additional shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options, unvested restricted share units and shares to be purchased under the ESPP. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share by application of the treasury stock method. Under the treasury stock method, an increase in fair market value of the Company’s share price can result in a greater dilutive effect from potentially dilutive securities. The following table sets forth the computation of basic and diluted net income per share attributable to the shareholders of Seagate Technology plc:

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(In millions, except per share data)

 

December 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Seagate Technology plc

 

$

428

 

$

492

 

$

855

 

$

1,074

 

Number of shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Total shares for purposes of calculating basic net income per share attributable to Seagate Technology plc

 

336

 

369

 

347

 

382

 

Weighted-average effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee equity award plans

 

10

 

10

 

10

 

12

 

Total shares for purpose of calculating diluted net income per share attributable to Seagate Technology plc

 

346

 

379

 

357

 

394

 

Net income per share attributable to Seagate Technology plc shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.27

 

$

1.33

 

$

2.46

 

$

2.81

 

Diluted

 

$

1.24

 

$

1.30

 

$

2.39

 

$

2.73

 

 

The anti-dilutive shares related to employee equity award plans that were excluded from the computation of diluted net income per share attributable to Seagate Technology plc. were immaterial for the three and six months ended December 27, 2013 and December 28, 2012.

 

13.       Legal, Environmental and Other Contingencies

 

The Company assesses the probability of an unfavorable outcome of all its material litigation, claims, or assessments to determine whether a liability had been incurred and whether it is probable that one or more future events will occur confirming the fact of the loss. In the event that an unfavorable outcome is determined to be probable and the amount of the loss can be reasonably estimated, the Company establishes an accrual for the litigation, claim or assessment. In addition, in the event an unfavorable outcome is determined to be less than probable, but reasonably possible, the Company will disclose an estimate of the possible loss or range of such loss; however, when a reasonable estimate cannot be made, the Company will provide disclosure to that effect. Litigation is inherently uncertain and may result in adverse rulings or decisions. Additionally, the Company may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on its results of operations. Accordingly, actual results could differ materially.

 

24



 

Intellectual Property Litigation

 

Convolve, Inc. (“Convolve”) and Massachusetts Institute of Technology (“MIT”) v. Seagate Technology LLC, et al.—On July 13, 2000, Convolve and MIT filed suit against Compaq Computer Corporation and Seagate Technology LLC in the U.S. District Court for the Southern District of New York, alleging infringement of U.S. Patent Nos. 4,916,635, “Shaping Command Inputs to Minimize Unwanted Dynamics” (the ‘635 patent) and U.S. Patent No. 5,638,267, “Method and Apparatus for Minimizing Unwanted Dynamics in a Physical System” (the ‘267 patent), misappropriation of trade secrets, breach of contract, and other claims. In the complaint, the plaintiffs requested injunctive relief, $800 million in compensatory damages and unspecified punitive damages, including for willful infringement and willful and malicious misappropriation. On January 16, 2002, Convolve filed an amended complaint, alleging defendants infringe US Patent No. 6,314,473, “System for Removing Selected Unwanted Frequencies in Accordance with Altered Settings in a User Interface of a Data Storage Device,” (the ‘473patent”). The district court ruled in 2010 that the ‘267 patent was out of the case.

 

On August 16, 2011, the district court granted in part and denied in part the Company’s motion for summary judgment. On July 1, 2013, the U.S. Court of Appeals for the Federal Circuit: 1) affirmed the district court’s summary judgment rulings that Seagate did not misappropriate any of the alleged trade secrets and that the asserted claims of the ‘635 patent are invalid; 2) reversed and vacated the district court’s summary judgment of non-infringement with respect to the ‘473 patent; and 3) remanded the case for further proceedings on the ‘473 patent. On October 29, 2013, Convolve filed a petition for writ of certiorari with the U.S. Supreme Court, seeking review of the Court of Appeals’ decision with respect to one of the trade secrets. The Supreme Court denied Convolve’s petition on December 9, 2013. In view of the district court’s August 16, 2011 ruling and the Court of Appeals’ July 1, 2013 ruling and the uncertainty regarding the amount of damages, if any, that could be awarded Convolve in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.

 

Alexander Shukh v. Seagate Technology—On February 12, 2010, Alexander Shukh filed a complaint against the Company in the U.S. District Court for the District of Minnesota, alleging, among other things, employment discrimination based on his Belarusian national origin and wrongful failure to name him as an inventor on several patents and patent applications. Mr. Shukh’s employment was terminated as part of a company-wide reduction in force in fiscal year 2009. He seeks damages in excess of $75 million. The Company believes the claims are without merit and intends to vigorously defend this case. A date for the start of trial has not yet been scheduled. In view of the uncertainty regarding the amount of damages, if any, that could be awarded in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.

 

LEAP Co., Ltd. v. Seagate Singapore International Headquarters Pte. Ltd. and Nippon Seagate Inc.—On July 4, 2012, LEAP Co., Ltd. filed a lawsuit in the Tokyo District Court of Japan against Seagate Singapore International Headquarters Pte. Ltd., Nippon Seagate Inc. and Buffalo Inc. alleging wrongful termination of purchase agreements and other claims, and seeking approximately $38 million in damages. A date for the start of trial has not yet been scheduled. The Company believes the claims are without merit and intends to vigorously defend this case. In view of the uncertainty regarding the amount of damages, if any, that could be awarded in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.

 

Realtek Semiconductor Corporation ITC Investigation re Certain Integrated Circuit Chips and Products Containing the Same—On September 19, 2012, Realtek Semiconductor Corporation filed a complaint with the International Trade Commission seeking an investigation pursuant to Section 337 of the Tariff Act of 1930, as amended. The complaint names LSI Corporation and Seagate Technology as respondents and alleges infringement of U.S. patents relating to integrated circuit chips that include bond pad structures. Realtek seeks an order to exclude entry of infringing integrated circuit chips and products containing the infringing integrated circuit chips into the U.S. and a cease and desist order. The ITC initiated an investigation on October 18, 2012. The target date for completion of the investigation is July 17, 2014. In view of the uncertainty regarding the possible outcome of this case and the nature of the relief sought, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible loss or range of loss, or other possible adverse result, if any, that may be incurred with respect to this matter.

 

Enova Technology Corporation v. Seagate Technology (US) Holdings, Inc., et al.-On June 5, 2013, Enova Technology Corporation filed a complaint against Seagate Technology (US) Holdings, Inc. and Seagate Technology LLC in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 7,136,995, “Cryptographic Device,” and U.S. Patent No. 7,900,057, “Cryptographic Serial ATA Apparatus and Method.” The complaint seeks unspecified compensatory damages, enhanced damages, injunctive relief, attorneys’ fees, and other relief. A date for the start of trial has not yet been scheduled. The Company believes the claims are without merit and intends to vigorously defend this case. In view of the uncertainty regarding the amount of damages, if any, that could be awarded in this matter, the Company does not believe that it is currently possible to determine a reasonable estimate of the possible range of loss related to this matter.

 

25



 

Environmental Matters

 

The Company’s operations are subject to U.S. and foreign laws and regulations relating to the protection of the environment, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. Some of the Company’s operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities.

 

The Company has established environmental management systems and continually updates its environmental policies and standard operating procedures for its operations worldwide. The Company believes that its operations are in material compliance with applicable environmental laws, regulations and permits. The Company budgets for operating and capital costs on an ongoing basis to comply with environmental laws. If additional or more stringent requirements are imposed on the Company in the future, it could incur additional operating costs and capital expenditures.

 

Some environmental laws, such as the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended, the “Superfund” law) and its state equivalents, can impose liability for the cost of cleanup of contaminated sites upon any of the current or former site owners or operators or upon parties who sent waste to these sites, regardless of whether the owner or operator owned the site at the time of the release of hazardous substances or the lawfulness of the original disposal activity. The Company has been identified as a potentially responsible party at several sites. At each of these sites, the Company has an assigned portion of the financial liability based on the type and amount of hazardous substances disposed of by each party at the site and the number of financially viable parties. The Company has fulfilled its responsibilities at some of these sites and remains involved in only a few at this time.

 

While the Company’s ultimate costs in connection with these sites is difficult to predict with complete accuracy, based on its current estimates of cleanup costs and its expected allocation of these costs, the Company does not expect costs in connection with these sites to be material.

 

The Company may be subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products. For example, the European Union (“EU”) enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, which prohibits the use of certain substances, including lead, in certain products, including disk drives, put on the market after July 1, 2006. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, Taiwan, China, Japan and others. The European Union REACH Directive (Registration, Evaluation, Authorization, and Restriction of Chemicals, EC 1907/2006) also restricts substances of very high concern (“SVHCs”) in products. If the Company or its suppliers fails to comply with the substance restrictions, recycle requirements or other environmental requirements as they are enacted worldwide, it could have a materially adverse effect on the Company’s business.

 

Other Matters

 

The Company is involved in a number of other judicial and administrative proceedings incidental to its business, and the Company may be involved in various legal proceedings arising in the normal course of its business in the future. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on its financial position or results of operations.

 

26



 

ITEM 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion of the financial condition and results of operations for our fiscal quarters ended December 27, 2013, September 27, 2013, and  December 28, 2012, referred to herein as the  “December 2013 quarter”, the “September 2013 quarter”, and the “December 2012 quarter”, respectively. Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “Seagate,” the “Company” and “our” refer to Seagate Technology plc, an Irish public limited company, and its subsidiaries. References to “$” are to United States dollars.

 

You should read this discussion in conjunction with financial information and related notes included elsewhere in this report. We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. The December 2013, September 2013, and December 2012 quarters were all 13 weeks. Except as noted, references to any fiscal year mean the twelve-month period ending on the Friday closest to June 30 of that year.

 

Some of the statements and assumptions included in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects and estimates of industry growth for the fiscal quarter ending March 28, 2014 and beyond. These statements identify prospective information and include words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” and similar expressions. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and are based on management’s current views and assumptions. These forward-looking statements are conditioned upon and also involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or events to differ materially from those anticipated by these forward-looking statements. Such risks, uncertainties and other factors may be beyond our control and may pose a risk to our operating and financial condition. Such risks and uncertainties include, but are not limited to: uncertainty in global economic conditions, as consumers and businesses may defer purchases in response to tighter credit and financial news; the impact of variable demand and the adverse pricing environment for disk drives, particularly in view of current business and economic conditions; dependence on our ability to successfully qualify, manufacture and sell our disk drive products in increasing volumes on a cost-effective basis and with acceptable quality, particularly the new disk drive products with lower cost structures; the impact of competitive product announcements; possible excess industry supply with respect to particular disk drive products and our ability to achieve projected cost savings in connection with restructuring plans. We also encourage you to read our Annual Report on Form 10-K for the year ended June 28, 2013, which contains information concerning risk, uncertainties and other factors that could cause results to differ materially from those projected in the forward-looking statements and this Form 10-Q. These forward-looking statements should not be relied upon as representing our views as of any subsequent date and we undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Our MD&A is organized as follows:

 

·                  Our Company. Overview of our business.

·                  Overview of the December 2013 quarter. The December 2013 quarter summary.

·                  Results of Operations. An analysis of our financial results comparing the December 2013 quarter to the September 2013 quarter and the December 2012 quarter.

·                  Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including the credit quality of our investment portfolio and potential sources of liquidity.

·                  Critical Accounting Policies. Accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

 

Our Company

 

We are a leading provider of electronic data storage products. Our principal products are hard disk drives, commonly referred to as disk drives, hard drives or HDDs. Hard disk drives are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality and cost effectiveness.

 

We produce a broad range of electronic data storage products including HDDs, solid state hybrid drives (SSHD) and solid state drives (SSD), which address enterprise applications, where our products are designed for enterprise servers, mainframes and workstations; client compute applications, where our products are designed primarily for desktop and notebook computers; and client non-compute applications, where our products are designed for a wide variety of end user devices such as digital video recorders (DVRs), personal data backup systems, portable external storage systems and digital media systems. In

 

27



 

addition to manufacturing and selling data storage products, we provide data storage services for small to medium-sized businesses, including online backup, data protection and recovery solutions.

 

Overview of the December 2013 Quarter

 

During the December 2013 quarter, we shipped 57 million units totaling 52 million exabytes, generating revenue of $3,528 million and gross margin of 28% of revenue. Our operating cash flow was  $856 million.  We repurchased approximately 33 million of our ordinary shares for approximately $1,520 million, and paid dividends of $142 million.  We also issued $800 million of 3.75% Senior Notes due November 2018 and purchased the remaining outstanding shares of LaCie S.A.  On December 21, 2013, we entered into an agreement to acquire Xyratex Ltd. for approximately $374 million in cash.  The acquisition is expected to close in the fourth quarter of the current fiscal year.

 

Results of Operations

 

We list in the table below summarized information from our Condensed Consolidated Statements of Operations by dollars and as a percentage of revenue for the periods indicated.

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(Dollars in millions)

 

December 27,
2013

 

September 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Revenue

 

$

 3,528

 

$

 3,489

 

$

 3,668

 

$

 7,017

 

$

 7,400

 

Cost of revenue

 

2,541

 

2,514

 

2,676

 

5,055

 

5,347

 

Gross margin

 

987

 

975

 

992

 

1,962

 

2,053

 

Product development

 

312

 

294

 

277

 

606

 

545

 

Marketing and administrative

 

190

 

181

 

139

 

371

 

289

 

Amortization of intangibles

 

25

 

20

 

20

 

45

 

39

 

Restructuring and other, net

 

16

 

2

 

1

 

18

 

1

 

Income from operations

 

444

 

478

 

555

 

922

 

1,179

 

Other expense, net

 

(2

)

(38

)

(56

)

(40

)

(80

)

Income before income taxes

 

442

 

440

 

499

 

882

 

1,099

 

Provision for income taxes

 

14

 

13

 

7

 

27

 

25

 

Net income

 

428

 

427

 

492

 

855

 

1,074

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

 

 

Net income attributable to Seagate Technology plc

 

$

 428

 

$

 427

 

$

 492

 

$

 855

 

$

 1,074

 

 

28



 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

December 27,
2013

 

September 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Revenue

 

100

%

100

%

100

%

100

%

100

%

Cost of revenue

 

72

 

72

 

73

 

72

 

72

 

Gross margin

 

28

 

28

 

27

 

28

 

28

 

Product development

 

9

 

9

 

8

 

9

 

7

 

Marketing and administrative

 

5

 

5

 

4

 

5

 

4

 

Amortization of intangibles

 

1

 

 

1

 

1

 

1

 

Restructuring and other, net

 

1

 

 

 

 

 

Income from operations

 

12

 

14

 

14

 

13

 

16

 

Other expense, net

 

 

(1

)

(1

)

(1

)

(1

)

Income before income taxes

 

12

 

13

 

13

 

12

 

15

 

Provision for income taxes

 

 

 

 

 

 

Net income

 

12

 

13

 

13

 

12

 

15

 

Less: Net income attributable to noncontrolling interest

 

 

 

 

 

 

Net income attributable to Seagate Technology plc

 

12

%

13

%

13

%

12

%

15

%

 

Revenue

 

The following table summarizes information regarding revenue, volume shipments, exabytes, average selling prices (ASPs) and revenues by channel and geography:

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(In millions, except
percentages, exabytes and ASPs)

 

December 27,
2013

 

September 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Net Revenue

 

$

3,528

 

$

3,489

 

$

3,668

 

$

7,017

 

$

7,400

 

Unit Shipments:

 

 

 

 

 

 

 

 

 

 

 

Enterprise

 

8

 

8

 

7

 

16

 

13

 

Client Compute

 

36

 

36

 

39

 

72

 

80

 

Client Non-Compute

 

13

 

12

 

12

 

25

 

23

 

Total Units Shipped

 

57

 

56

 

58

 

113

 

116

 

ASPs (per unit)

 

$

62

 

$

62

 

$

62

 

$

62

 

$

63

 

Exabytes Shipped

 

52

 

49

 

48

 

101

 

90

 

Revenues by Channel (%)

 

 

 

 

 

 

 

 

 

 

 

OEMs

 

66

%

68

%

67

%

67

%

66

%

Distributors

 

21

%

21

%

21

%

21

%

23

%

Retailers

 

13

%

11

%

12

%

12

%

11

%

Revenues by Geography (%)

 

 

 

 

 

 

 

 

 

 

 

Americas

 

27

%

29

%

26

%

28

%

26

%

EMEA

 

20

%

18

%

21

%

19

%

19

%

Asia Pacific

 

52

%

53

%

53

%

53

%

55

%

 

Revenue in the December 2013 quarter was flat compared to the September 2013 quarter as the slight increase in shipments was offset by modest price erosion.

 

Revenue for the  December 2013 quarter decreased by $140 million, or 4%, compared to the December 2012 quarter due to a decrease in units shipped partially offset by favorable product mix.

 

29



 

Revenue for the six months ended December 2013 decreased by $383 million, or 5%, as compared to the six months ended December 2012 primarily due to decreased units shipped and price erosion partially offset by a favorable product mix.

 

We maintain various sales programs such as point-of-sale rebates, sales price adjustments and price protection, aimed at increasing customer demand. During the December 2013 quarter, sales programs were approximately 7.5% of gross revenue, which is within our historical range of 6%-10%. Adjustments to revenues due to under or over accruals for sales programs related to revenues reported in prior quarterly periods have averaged 0.4% of quarterly gross revenue for fiscal years 2012 and 2013, and were 0.8% of quarterly gross revenue in the December 2013 quarter.

 

Cost of Revenue and Gross Margin

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(Dollars in millions)

 

December 27,
2013

 

September 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Cost of revenue

 

$

2,541

 

$

2,514

 

$

2,676

 

$

5,055

 

$

5,347

 

Gross margin

 

987

 

975

 

992

 

1,962

 

2,053

 

Gross margin percentage

 

28

%

28

%

27

%

28

%

28

%

 

Gross margins as a percentage of revenue were consistent when compared to both the September 2013 quarter and December 2012 quarter. These margins reflect a stable pricing environment where modest price erosion and improved product mix were offset by unfavorable market mix.

 

In the December 2013 quarter, total warranty cost was 1.2% of revenue and net of unfavorable changes in estimates of prior warranty accruals of approximately 0.1% of revenue.  Warranty cost related to new shipments was 1.4% of revenue for  September 2013 quarter, December 2013 quarter, and December 2012 quarter.

 

Operating Expenses

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(Dollars in millions)

 

December 27,
2013

 

September 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Product development

 

$

312

 

$

294

 

$

277

 

$

606

 

$

545

 

Marketing and administrative

 

190

 

181

 

139

 

371

 

289

 

Amortization of intangibles

 

25

 

20

 

20

 

45

 

39

 

Restructuring and other, net

 

16

 

2

 

1

 

18

 

1

 

Operating expenses

 

$

543

 

$

497

 

$

437

 

$

1,040

 

$

874

 

 

Product development expense.  Product development expense for the December 2013 quarter increased by $18 million, or 6%, when compared to the September 2013 quarter primarily due to investments in storage technologies and headcount related expenses. Compared to the December 2012 quarter, product development expense increased $35 million, or 13%, which includes a $17 million increase in investments in storage technologies and a $14 million increase in headcount related expenses.

 

Product development expense for the six months ended December 2013 increased by $61 million, or 11% compared to  the six months ended December 2012  which includes a $32 million increase in  investments in storage technologies and a $24 million increase in headcount related expenses.

 

Marketing and administrative expense. Marketing and administrative expense for the December 2013 quarter increased by $9 million, or 5% compared to the September 2013 quarter, mostly due to an increase in legal expenses and headcount related expenses. Compared to the December 2012 quarter, marketing and administrative expense increased by $51 million, or 37%, which includes an increase in legal expenses of $24 million, which included the recognition of a non-recurring legal cost reimbursement of $21 million we received in the December 2012 quarter; a $12 million increase in headcount related expenses, and an $8 million increase in expenses related to the enhancement of our core business operations.

 

Marketing and administrative expense for the six months ended December 2013 increased by $82 million, or 28% as compared to the six months ended  December 2012 which included a $27 million increase in legal expenses resulting from the recognition of a non-recurring legal cost reimbursement of $21 million we received in the December 2012 quarter; a

 

30



 

$25 million increase in headcount related expenses; and a $13 million increase in expenses related to the enhancement of core businesses.

 

Amortization of intangibles. Amortization of intangibles for the December 2013 quarter increased as compared to the September 2013 quarter and the December 2012 quarter due to the commencement of the in-process research and development asset amortization. Amortization of intangibles for the six months ended December 2013 increased compared to the six months ended December 2012 due to the commencement of the in-process research and development asset amortization.

 

Restructuring and Other, net. Restructuring and other, net for the three and six months ended December 2013 increased due to a restructuring charge recorded during the December 2013 quarter  associated with a reduction in the work force.

 

Other expense, net

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(Dollars in millions)

 

December 27,
2013

 

September 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Other expense, net

 

$

(2

)

$

(38

)

$

(56

)

$

(40

)

$

(80

)

 

Other expense, net decreased by $36 million or  95% during the December 2013 quarter compared to the September 2013 quarter primarily due to a gain of $32 million from the sale of one of our strategic investments. Other expense, net decreased by $54 million or 96%  compared to the December 2012 quarter which includes a gain of $32 million from the sale of one of our strategic investments, gains of $13 million from foreign currency remeasurement, and a $6 million decrease in our interest expense due to lower interest rates on our outstanding debt, partially offset by a higher overall debt balance.

 

Other expense, net for the six months ended December 2013 decreased as compared to the corresponding period in the prior year, primarily due to gains on foreign currency remeasurement of $21 million and a decrease in our interest expense of $17 million due to lower interest rates on our outstanding debt, partially offset by a higher overall debt balance.

 

Income taxes

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(Dollars in millions)

 

December 27,
2013

 

September 27,
2013

 

December 28,
2012

 

December 27,
2013

 

December 28,
2012

 

Provision for income taxes

 

$

14

 

$

13

 

$

7

 

$

27

 

$

25

 

 

Our income tax provision recorded for the December 2013 quarter and for the first half of fiscal year 2014 included approximately $4 million and $6 million, respectively, of net discrete tax expense primarily related to  increases in income tax reserves recorded for non-U.S. income positions taken in prior fiscal years offset by the tax benefits from the reversal of a portion of the U.S. valuation allowance recorded in prior periods and tax benefits associated with the release of tax reserves associated with the expiration of certain statutes of limitation.

 

Our income tax provision for the December 2013 quarter and for the first half of fiscal year 2014 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain U.S. deferred tax assets.

 

The IRS and Treasury Department on September 13, 2013, released final regulations under Sections 162(a) and 263(a) on the deduction and capitalization of expenditures related to tangible personal property (the final repair regulations).  The entirety of the final repair regulations apply to our first quarter of fiscal year 2015. Application of these regulations is not expected to have a material impact on our consolidated financial statements.

 

During the six months ended December 27, 2013, our unrecognized tax benefits excluding interest and penalties increased by $16 million to $173 million. The unrecognized tax benefits that, if recognized, would impact our effective tax rate was $173 million at December 27, 2013, subject to certain future valuation allowance reversals. During the 12 months beginning December 28, 2013, we expect to reduce our unrecognized tax benefits by approximately zero to $30 million primarily as a result of the completion of various audit cycles and the expiration of certain statutes of limitation.

 

31



 

Our income tax provision recorded for the December 2012 quarter included approximately $6 million of net discrete tax benefits primarily from the release of tax reserves associated with the expiration of certain statutes of limitation.  Our income tax provision recorded for the first half of fiscal year 2013 included approximately $1 million of net discrete tax expense primarily associated with the reversal of prior period tax benefits offset by the release of tax reserves associated with the expiration of certain statutes of limitation.

 

Our income tax provision for the December 2012 quarter and for the first half of fiscal year 2013 differed from the provision for income taxes that would be derived by applying the Irish statutory rate of 25% to income before income taxes, primarily due to the net effect of (i) tax benefits related to non-U.S. earnings generated in jurisdictions that are subject to tax holidays or tax incentive programs and are considered indefinitely reinvested outside of Ireland and (ii) a decrease in valuation allowance for certain U.S. deferred tax assets. The acquisition of a majority interest in the outstanding shares of LaCie did not have a material impact on our effective tax rate in fiscal year 2013.

 

Liquidity and Capital Resources

 

The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash and our liquidity and capital resources. Our cash and cash equivalents are maintained in investments with remaining maturities of 90 days or less at the time of purchase. Our short-term investments consist of readily marketable securities with remaining maturities of more than 90 days at the time of purchase. The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We intend to maintain a highly liquid portfolio by investing only in those marketable securities that we believe have active secondary or resale markets. We believe our cash equivalents and short-term investments are liquid and accessible. We operate in some countries that have restrictive regulations over the movement of cash and/or foreign exchange across their borders. However, these restrictions have not impeded our ability to conduct our business, nor do we expect them to in the next 12 months. We are not aware of any downgrades, losses or other significant deterioration in the fair value of our cash equivalents or short-term investments and accordingly, we do not believe the fair value of our short-term investments has significantly changed from the values reported as of December 27, 2013.

 

Cash and Cash Equivalents, Short-term Investments, and Restricted Cash and Investments

 

(Dollars in millions)

 

December 27,
2013

 

June 28,
2013

 

Change

 

Cash and cash equivalents

 

$

2,293

 

$

1,708

 

$

585

 

Short-term investments

 

46

 

480

 

(434

)

Restricted cash and investments

 

4

 

101

 

(97

)

Total

 

$

2,343

 

$

2,289

 

$

54

 

 

Our cash and cash equivalents, short-term investments and restricted cash and investments increased from June 28, 2013 as a result of net cash provided by operating activities and the proceeds from the issuance of $800 million of our 3.75% Senior Notes due 2018, partially offset by the repurchase of our ordinary shares, capital expenditures, and dividends paid to our shareholders.

 

Cash Provided by Operating Activities

 

Cash provided by operating activities for the six months ended December 27, 2013 of $1,538 million includes the effects of net income adjusted for non-cash items including depreciation, amortization, share-based compensation, and:

 

·                  a decrease of  $104 million from Restricted cash and investments primarily as the restricted cash and investments held by a rabbi trust were replaced with a standby letter of credit;

 

·                  a decrease of $199 million in vendor non-trade receivables primarily related to a change in the contractual relationship with some of our contract manufacturers;

 

·                  an increase of $94 million in inventory primarily related to an increase in consigned inventory held at our contract manufacturers; and

 

·                  a decrease of $46 million in accounts payable due to a reduction in direct materials purchased.

 

Cash Provided by Investing Activities

 

Cash provided by investing activities for the six months ended December 27, 2013 of $177 million includes $463 million of proceeds from sales of short-term investments partially offset by $304 million for payments for acquired property, equipment and leasehold improvements.

 

32



 

Cash Used in Financing Activities

 

Net cash used in financing activities of $1,132 million for the six months ended December 27, 2013 was primarily attributable to approximately $1,702 million paid to repurchase 37 million of our ordinary shares and dividend payments of $277 million  partially offset by $791 million received from the issuance of our 3.75% Senior Notes.

 

Liquidity Sources, Cash Requirements and Commitments

 

Our primary sources of liquidity as of December 27, 2013, consisted of: (1) approximately $2.3 billion in cash, cash equivalents, and short-term investments, (2) cash we expect to generate from operations and (3) a $500 million senior revolving credit facility.

 

As of December 27, 2013, no borrowings have been drawn under the revolving credit facility, and $2 million had been utilized for letters of credit. The line of credit is available for borrowings, subject to compliance with financial covenants and other customary conditions to borrowings.

 

The credit agreement that governs our revolving credit facility, as amended, contains certain covenants that we must satisfy in order to remain in compliance with the credit agreement, as amended. The agreement also includes three financial covenants: (1) minimum cash, cash equivalents and marketable securities; (2) a fixed charge coverage ratio; and (3) a net leverage ratio. As of December 27, 2013, we were in compliance with all of the covenants under our Revolving Credit Facility and debt agreements. Based on our current outlook, we expect to be in compliance with the covenants of our debt agreements over the next 12 months.

 

Our liquidity requirements are primarily to meet our working capital, product development and capital expenditure needs, to fund scheduled payments of principal and interest on our indebtedness, and to fund our quarterly dividend. Our ability to fund these requirements will depend on our future cash flows, which are determined by future operating performance, and therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control.

 

For fiscal year 2014, we expect capital expenditures to remain at, or below, the low end of our long-term targeted range of 6% to 8% of revenue.

 

From time to time we may repurchase any of our outstanding notes in open market or privately negotiated purchases or otherwise, or may repurchase outstanding notes pursuant to the terms of the applicable indenture.

 

On January 21, 2014, our Board of Directors (the “Board”) approved a cash dividend of $0.43 per share, payable on February 24, 2014 to shareholders of record as of the close of business on February 10, 2014. The payment of any future quarterly dividends will be at the discretion of the Board and will be dependent upon our financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the Board.

 

From time to time we may repurchase any of our outstanding ordinary shares through private, open market, or broker assisted purchases.  As of December 27, 2013,  $1.7 billion remained available for repurchase under our existing repurchase authorization limit.  All repurchases are effected as redemptions in accordance with the Company’s Articles of Association.

 

Critical Accounting Policies

 

Our discussion and analysis of financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.

 

Since our fiscal year ended June 28, 2013, there have been no material changes in our critical accounting policies and estimates other than the Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income discussed in Part I, Item 1. Financial Statements—Note 1. Basis of Presentation and Summary of Significant Accounting Policies in this Form 10-Q.  Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended June 28, 2013, as filed with the SEC on August 7, 2013, for a discussion of our critical accounting policies and estimates.

 

33



 

Recent Accounting Pronouncements

 

See Part I, Item 1. Financial Statements—Note 1. Basis of Presentation and Summary of Significant Accounting Policies for information regarding the effect of new accounting pronouncements on our financial statements.

 

ITEM 3.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have exposure to market risks due to the volatility of interest rates, foreign currency exchange rates, and equity and bond markets. A portion of these risks are hedged, but fluctuations could impact our results of operations, financial position and cash flows. Additionally, we have exposure to downgrades in the credit ratings of our counterparties as well as exposure related to our credit rating changes.

 

Interest Rate Risk.  Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. At December 27, 2013, we had no material available-for-sale securities that had been in a continuous unrealized loss position for a period greater than 12 months. The Company determined no material available-for-sale securities were other-than-temporarily impaired as of December 27, 2013.  We currently do not use derivative financial instruments in our investment portfolio.

 

We have fixed rate debt obligations. We enter into debt obligations to support general corporate purposes including capital expenditures and working capital needs.

 

The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio and debt obligations as of December 27, 2013.

 

Fiscal Years Ended

 

(Dollars in millions, except percentages)

 

2014

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

 

Fair Value at
December 27,
2013

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

1,965

 

$

 

$

 

$

 

$

 

$

 

$

1,965

 

$

1,965

 

Average interest rate

 

0.06

%

 

 

 

 

 

 

 

 

 

 

0.06

%

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

14

 

$

32

 

$

 

$

 

$

 

$

 

$

46

 

46

 

Average interest rate

 

1.40

%

1.37

%

%

%

%

%

1.38

%

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate

 

$

 

$

 

$

 

$

 

$

 

$

17

 

$

17

 

15

 

Average interest rate

 

 

 

 

 

 

 

 

 

 

 

1.21

%

1.21

%

 

 

Total fixed income

 

$

1,979

 

$

32

 

$

 

$

 

$

 

$

17

 

$

2,028

 

$

2,026

 

Average interest rate

 

0.07

%

1.37

%

%

%

%

1.21

%

0.10

%

 

 

Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

 

$

 

$

 

334

 

$

 

3,238

 

$

3,572

 

$

3,700

 

Average interest rate

 

%

%

%

6.8

%

%

5.53

%

5.64

%

 

 

 

Foreign Currency Exchange Risk. We may enter into foreign currency forward exchange contracts to manage exposure related to certain foreign currency commitments and anticipated foreign currency denominated expenditures. Our policy prohibits us from entering into derivative financial instruments for speculative or trading purposes.

 

We also hedge a portion of our foreign currency denominated balance sheet positions with foreign currency forward exchange contracts to reduce the risk that our earnings will be adversely affected by changes in currency exchange rates. The changes in fair value of these hedges are recognized in earnings in the same period as the gains and losses from the remeasurement of the assets and liabilities. These foreign currency forward exchange contracts are not designated as hedging instruments under ASC 815, Derivatives and Hedging. All these forward contracts mature within 12 months.

 

We evaluate hedging effectiveness prospectively and retrospectively and record any ineffective portion of the hedging instruments in Cost of revenue on the Consolidated Statements of Operations. We did not have any material net gains (losses)

 

34



 

recognized in Cost of revenue for cash flow hedges due to hedge ineffectiveness or discontinued cash flow hedges during the  three  months ended December 27, 2013.

 

The table below provides information as of December 27, 2013 about our foreign currency forward exchange contracts. The table is provided in U.S. dollar equivalent amounts and presents the notional amounts (at the contract exchange rates) and the weighted average contractual foreign currency exchange rates.

 

(Dollars in millions,
except average contract rate)

 

Notional
Amount

 

Average
Contract
Rate

 

Estimated
Fair
Value (1)

 

Foreign currency forward exchange contracts:

 

 

 

 

 

 

 

Thai baht

 

$

18

 

31.50

 

$

(1

)

Singapore dollar

 

118

 

1.25

 

(1

)

Total

 

$

136

 

 

 

$

(2

)

 


(1)         Equivalent to the unrealized net gain (loss) on existing contracts.

 

Other Market Risks. We have exposure to counterparty credit downgrades in the form of credit risk related to our foreign currency forward exchange contracts and our fixed income portfolio. We monitor and limit our credit exposure for our foreign currency forward exchange contracts by performing ongoing credit evaluations. We also manage the notional amount of contracts entered into with any one counterparty, and we maintain limits on maximum tenor of contracts.

 

Additionally, the investment portfolio is diversified and structured to minimize credit risk. As of December 27, 2013, we did not have a material credit exposure related to our foreign currency forward exchange contracts in a gain position. Changes in our corporate issuer credit ratings have minimal impact on our financial results, but downgrades may negatively impact our future transaction costs and our ability to execute transactions with various counterparties.

 

We are subject to equity market risks due to changes in the fair value of the notional investments selected by our employees as part of our Seagate Deferred Compensation Plan (the “SDCP”) and on certain strategic investments in equities of publicly traded companies. In the quarter ended December 27, 2013 the Company entered into a Total Return Swap (TRS) in order to manage the equity market risks associated with the SDCP liabilities. The Company pays a floating rate, based on LIBOR plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCP liability due to changes in the value of the investment options made by employees.

 

As of December 27, 2013, we continued to hold auction rate securities with a par value of approximately $17 million, all of which are collateralized by student loans guaranteed by the Federal Family Education Loan Program. Beginning in the March 2008 quarter, these securities have continuously failed to settle at auction. As of December 27, 2013, the estimated fair value of these auction rate securities was $15 million. We believe that the impairments totaling approximately $2 million are temporary as we do not intend to sell these securities and have concluded it is not more likely than not that we will be required to sell the securities before the recovery of the amortized cost basis. As such, the impairment was recorded in Other comprehensive loss and these securities were classified as long-term investments.

 

ITEM 4.            CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report.  Based on the evaluation, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective as of December 27, 2013.  During the quarter ended December 27, 2013, there were no changes in our internal control over financial reporting that materially affected, or were reasonably likely to materially affect our internal control over financial reporting.

 

35



 

PART II

OTHER INFORMATION

 

ITEM 1.            LEGAL PROCEEDINGS

 

For a discussion of legal proceedings, see Part I, Item 1. Financial Statements—Note 13, Legal, Environmental and Other Contingencies of this Report on Form 10-Q.

 

ITEM 1A.                     RISK FACTORS

 

There have been no material changes to the description of the risk factors associated with our business previously disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended June 28, 2013.  In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in our Annual Report on Form 10-K as they could materially affect our business, financial condition and future results.

 

The Risk Factors are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

 

ITEM 2.            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Repurchase of Equity Securities

 

On April 26, 2012, the Board of Directors authorized the Company to repurchase $2.5 billion of its outstanding ordinary shares. There is no expiration date on this authorization.

 

On July 24, 2013, the Board of Directors authorized the Company to repurchase an additional $2.5 billion of its outstanding ordinary shares. There is no expiration date on this authorization.

 

All repurchases are effected as redemptions in accordance with the Company’s Articles of Association.

 

The following table sets forth information with respect to all repurchases of our shares made during fiscal quarter ended December 27, 2013:

 

(In millions, except average price paid per share)

 

Total Number
of
Shares
Repurchased
(1)

 

Average
Price Paid
per Share

 

Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs

 

Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs

 

 

 

 

 

 

 

 

 

 

 

September 28, 2013 through October 25, 2013

 

33.0

 

$

46.01

 

33.0

 

$

1,701

 

October 26, 2013 through November 29, 2013

 

 

 

 

1,701

 

November 30, 2013 through December 27, 2013

 

 

 

 

1,701

 

Total

 

33.0

 

$

46.01

 

33.0

 

$

1,701

 

 


(1) During this period we purchased approximately 31 thousand ordinary shares in transactions unrelated to publicly announced share plans or programs. These transactions consisted of acquisitions of shares via share withholding for tax obligations due from our non-employee directors in connection with the vesting of certain equity awards. These purchases of shares do not affect our aggregate available authorization for the share purchase programs described above.

 

ITEM 3.            DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.            MINE SAFETY DISCLOSURES

 

Not applicable.

 

36



 

ITEM 5.           OTHER INFORMATION

 

Not applicable

 

ITEM 6.            EXHIBITS

 

See Exhibit Index on the page immediately following the signature page to this Report for a list of exhibits to this Report, which Exhibit Index is incorporated herein by reference.

 

37



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY

 

 

 

 

 

 

 

 

DATE:

January 28, 2014

BY:

/s/ STEPHEN J. LUCZO

 

 

 

Stephen J. Luczo

 

 

 

Chairman and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

DATE:

January 28, 2014

BY:

/s/ PATRICK J. O’MALLEY

 

 

 

Patrick J. O’Malley

 

 

 

Executive Vice President, Finance and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

38



 

EXHIBIT INDEX

 

Exhibit Number

 

Description of Exhibit

 

 

 

2.1 

 

Agreement and Plan of Merger, dated as of December 21, 2013, among Seagate Technology International, Phoenix Acquisition Ltd and Xyratex Ltd., were filed as Exhibit 2.1 to the current report on Form 8-K filed by Seagate Technology plc (the “Company”) on December 23, 2013 and are incorporated herein by reference.

 

 

 

3.1 

 

Memorandum and Articles of Association of the Company, as amended and restated by Special Resolution dated October 30, 2013, were filed as Exhibit 3.1 to the Company’s current report on Form 8-K filed on November 1, 2013, and are incorporated herein by reference.

 

 

 

3.2 

 

Certificate of Incorporation of Hephaestus plc effective as of January 22, 2010 and Certificate of Incorporation on change of name of Seagate Technology plc, effective as of February 22, 2010 were filed as Exhibit 3.2 to the Company’s annual report on Form 10-K for the fiscal year ended July 2, 2010, and are incorporated herein by reference.

 

 

 

10.1+

 

Fifth Amended and Restated Seagate Technology Executive Severance and Change in Control (CIC) Plan

 

 

 

10.2

 

The Company’s Amended and Restated Executive Officer Performance Bonus Plan was filed as Exhibit 10.1 to the Company’s current report on Form 8-K filed on November 1, 2013 and is incorporated herein by reference.

 

 

 

31.1+

 

Certification of Stephen J. Luczo, Chairman and Chief Executive Officer of the Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2+

 

Certification of Patrick J. O’Malley, Executive Vice President and Chief Financial Officer of the Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1+†

 

Certification of Stephen J. Luczo, Chairman and Chief Executive Officer of the Company and Patrick J. O’Malley, Executive Vice President and Chief Financial Officer of the Company, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS+

 

XBRL Instance Document.

 

 

 

101.SCH+

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL+

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF+

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB+

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE+

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 


+  Filed herewith.

 

† The certifications attached as Exhibit 32.1 that accompany this Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Seagate Technology plc under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

39